Economic Outlook: Another foreclosure mess

In the mid 1980s in a one-horse town in upstate New York, the government, with good reasoning, decided to build an addition to the Interstate highway system.

It was all going according to plan. Bids were put out, contracts signs and dump trucks arrived on the scene along with the rest of the mammoth paraphernalia that goes with highway construction.

Then one day on a dirt road next to a brand new exit ramp a dump truck lost control if its brakes. They simply didn't work. Down went the truck, which careened across the two-lane road that the new interstate was replacing and slammed into the only two stores in the whole village -- a post office and a small convenience store.

In one felled swoop, one truck had virtually wiped out a village. Nobody was hurt, but many people were furious. They looked high and low for some infraction, some regulation or law that this truck driver or the company might have broken.

But it turned out there was none. The truck was legal. It was a fluke malfunction and a fluke accident. Officials were so mad, however, they had to do something, so they charged the truck driver with procession of a knife.

This comes to mind when contemplating the dance of anger involved in prosecuting the major U.S. banks with running foreclosure mills in 2009 and 2010 that, as it turned out, were guilty of cheating homeowners of due process by simply rushing through the mountains of foreclosures that came about largely due to the banks' own reckless lending.

Stuck with hundreds of thousands of foreclosures to process, banks undoubtedly cut a few important corners along the way.

When the banks were busted for shoddy, race-to-the-finish-line processing in so-called foreclosure mills, it was as easy a case as prosecutors ever were given. Attorneys general from all 50 states joined in the fun and in the first round they exacted a $26 billion settlement from five major banks, a fairly hefty payoff for their troubles.

What the country was looking for, however, was one small, lousy incident in which a bank maliciously cheated a homeowner out of due process and threw a family out in the street -- a poster child for financial industry greed.

Instead, they found mostly incompetence, not outright malicious corporate behavior.

Months later, the story is turning out to be the poster child for irony, not greed. Along with the $26 billion settlement, regulators ordered banks to do a case-by-case review of their mortgages, to do it right and to find, if possible, the elusive poster child for corporate callousness.

Instead, The New York Times reported Friday, the government reinvented the wheel. This week, regulators settled for a quick, $8.5 billion with 10 banks because government efforts to review loans was such a mess, they seemed to be imitating the malfeasance the government was looking to uncover.

Similar to the foreclosure debacle, subcontractors were hired to do the case-by-case reviews. After that, the process looks similar to the banks' efforts except that banks rushed to save money and reviewers appear to have put on the brakes to make as much as they could.

In one case, the Times reported, work was slow to arrive, so reviewers sat around doing nothing for a month, but collecting a paycheck. Reviews were expected to take eight hours per loan at $250 per hour were taking 20 hours to complete. As such, the government spent $1 billion looking for a needle in a haystack.

It is certainly not hard to find stories of hardship and despair. One woman was evicted in 2008, but did not know the bank had reversed its decision and now, for the second time on the same house, she is facing a foreclosure process.

Well-paid subcontractors are now being accused of botching the review of loans undertaken because banks had apparently botched their own foreclosures.

As the Times pointed out, former Federal Deposit Insurance Corp. Chairwoman Sheila Bair offered an explanation that sounds eerily familiar; it is exactly what the banks said in 2010.

"This thing is a big mess which was dumped into the lap of the current Office of the Comptroller of the Currency leadership. They are trying to make the best out of a very bad situation," said Bair, who opposed doing the reviews in the first place.

In international markets Friday, the Nikkei 225 index in Japan rose 1.4 percent while the Shanghai composite index in China fell 1.78 percent. The Hang Seng index in Hong Kong dropped 0.39 percent while the Sensex in India was flat, rising less than 0.01 percent.

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